The recent pullback in the Canadian market is giving income investors a chance to pick up some quality names with very attractive distributions.
Here are the reasons why I think investors should put Inter Pipeline Ltd. (TSX:IPL) and Potash Corp./Saskatchewan Inc. (TSX:POT)(NYSE:POT) on their watch lists.
Inter Pipeline
The oil rout is taking its toll on any stock connected to the energy sector, but not all companies are equally affected, and Inter is starting to look oversold.
Inter owns more than 7,000 km of petroleum pipelines and 4.8 million barrels of storage in western Canada. In total, the company moves about 35% of all oil sands production and 15% of western Canada’s conventional oil.
Oil sands producers are feeling the heat from new government taxes and low prices, but they are still mining a lot of oil and need to move it to their customers. Inter has long-term contracts in place with its customers, and that should ensure stable cash flow through the current downturn in the sector.
Inter continues to invest in growth. The company just completed a $112 million expansion on its Mid-Saskatchewan pipeline system and is working on a $65 million storage tank expansion that will add 400,000 barrels of storage capacity, which should be in service next year.
In Europe, Inter has a growing bulk liquids storage business. The company is actually one of Europe’s largest independent tank storage companies with assets in the U.K., Ireland, Sweden, and Denmark.
The company reported solid Q2 2015 results. Funds from operations were a record $181 million, a 37.5% increase over the same period last year.
Net income for the quarter rose 12%. Inter pays a monthly dividend of 12.25 cents that yields 6%. The payout ratio is about 72%, so the distribution should be safe.
Potash Corp.
The case for buying Potash Corp. is pretty simple. The world has more mouths to feed every year, and farmers have to use Potash Corp.’s products to grow the food needed to meet the increasing demand.
Potash demand hit a record 61 million tonnes in 2014, and this year’s global shipments should be about the same.
At the moment, there is an oversupply in the market and that is putting a lid on prices, but the world only has a handful of major producers, and the price war will eventually run its course.
The long-term outlook for the industry is positive and Potash Corp. is preparing for future growth. The company is wrapping up a series of expansion projects and once those switch from development to production, investors should see a windfall of free cash flow available for share buybacks and higher dividends.
Potash Corp. delivered solid Q2 2015 earnings of $0.50 per share. Operating cash flow was $836 million and free cash flow was $532 million. The company paid investors $312 million in dividends, so the distribution is easily covered.
The current quarterly dividend of US$0.38 per share yields about 6.1%. With the stock now trading at just 12.4 times forward earnings, investors can collect a solid yield and could see substantial stock price gains once the fertilizer cycle turns.
